Section 108 Reduction of Tax Attributes for S Corporations, 45656-45660 [E8-17952]
Download as PDF
<![CDATA[
45656
Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules
research that primarily or solely benefits
another client of the adviser. We
specifically ask for comment on the
information that boards should request
and that the adviser should provide in
connection with the board’s review of
the advisory contract under section
15(c).
yshivers on PROD1PC62 with PROPOSALS
IV. Disclosure to Other Advisory
Clients and Fund Investors
Our proposed guidance is designed to
provide fund directors with information
that will help them fulfill their oversight
obligations with respect to the trading
practices of the fund’s investment
adviser, including the adviser’s use of
soft dollars. The fact that the guidance
is focused on fund boards should not be
interpreted as an indication that the
current level of soft dollar disclosure
that is provided to other advisory clients
and fund investors cannot be
improved.89 Accordingly, we solicit
comment on whether we should
propose additional disclosure
requirements.
Currently, Part II of Form ADV, the
adviser’s firm brochure, must address
the adviser’s soft dollar practices.
However, a 1998 report from our Office
of Compliance Inspections and
Examinations (‘‘OCIE’’) observed that
advisers’ disclosure often failed to
provide sufficient information for
clients or prospective clients to
understand the advisers’ soft dollar
practices and the conflicts those
practices present.90 In its report, OCIE
stated that most advisers’ descriptions
of soft dollar practices were boilerplate,
and urged that we consider amending
Form ADV to require better
disclosure.91 We sought to address this
concern in our proposed amendments to
Part 2 of Form ADV.92 As currently
89 We have considered enhancing soft dollar
disclosure requirements in the past. For example,
the Commission proposed a rule in 1995 that would
have required an adviser to provide its clients with
an annual report setting forth certain information
about the adviser’s use of client brokerage and the
soft dollar services received by the adviser. The
report would have included certain quantitative
information about brokerage allocation and
commissions paid. See Disclosure by Investment
Advisers Regarding Soft Dollar Practices,
Investment Advisers Act Release No. 1469 (Feb. 14,
1995) [60 FR 9750 (Feb. 21, 1995)].
90 See 1998 Staff Report.
91 Id.
92 See Amendments to Form ADV, Investment
Advisers Act Release No. 2711 (March 3, 2008) [73
FR 13958 (March 14, 2008)]. As proposed, Item 12
of Part 2 would require an adviser that receives soft
dollar products and services to disclose its practices
and to discuss the conflicts of interest they create.
Specifically, Part 2 would require an adviser to
disclose to clients: (i) That it receives a benefit
because it does not have to produce or pay for the
products and services; (ii) that it has an incentive
to select broker-dealers based on its interests
instead of clients’ interests in receiving best
VerDate Aug<31>2005
15:30 Aug 05, 2008
Jkt 214001
proposed, Form ADV would require
advisers to discuss the conflicts of
interest inherent in an adviser’s soft
dollar practices and to describe the
products and services acquired with soft
dollars with enough specificity to
permit clients to evaluate the conflicts
of interest involved.93
The guidance we are proposing today
reflects the Commission’s view of the
critical role fund boards play in
managing the adviser’s conflicts of
interest. We request general comment
on our proposed guidance. In addition,
we specifically request comment on
whether: (i) Further disclosure to fund
investors of the information we suggest
fund boards should consider would be
helpful; (ii) any specific disclosure
should be mandated to better assist
investors in making informed
investment decisions; and (iii) the
public dissemination of particular
information regarding a fund adviser’s
portfolio trading practices would have
an adverse impact on the fund adviser’s
relationships with the broker-dealers
that execute fund portfolio transactions.
We also request comment on whether
we should again consider proposing to
require investment advisers to provide
their clients with customized
information about how their individual
brokerage is being used. If so, what
types of information would be useful
and in what detail? Should the
information provided be different for
institutional and non-institutional
clients? Do institutional clients already
require their advisers to provide
information to them about soft dollars
on a regular basis, and if so, what kind
of information do they receive? What
are the cost implications of requiring
individual client reports?
V. Solicitation of Additional Comments
In addition to the areas for comment
identified above, we are interested in
any other issues that commenters may
wish to address relating to fund board
oversight of advisers’ portfolio trading
practices. Please be as specific as
possible in your discussion and analysis
of any additional issues.
By the Commission.
execution; (iii) whether or not it pays-up for soft
dollar benefits; (iv) whether soft dollar benefits are
used to service all of its accounts or just the
accounts that paid for the benefits; and (v) the
products and services it receives, describing them
with enough specificity for clients to understand
and evaluate possible conflicts of interest.
93 Id.
PO 00000
Frm 00022
Fmt 4702
Sfmt 4702
Dated: July 30, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8–18035 Filed 8–5–08; 8:45 am]
BILLING CODE 8010–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–102822–08]
RIN 1545–BH54
Section 108 Reduction of Tax
Attributes for S Corporations
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:
SUMMARY: This document contains
proposed regulations that provide
guidance on the manner in which an S
corporation reduces its tax attributes
under section 108(b) for taxable years in
which the S corporation has discharge
of indebtedness income that is excluded
from gross income under section 108(a).
In particular, the regulations address
situations in which the aggregate
amount of the shareholders’ disallowed
section 1366(d) losses and deductions
that are treated as a net operating loss
tax attribute of the S corporation
exceeds the amount of the S
corporation’s excluded discharge of
indebtedness income. The proposed
regulations will affect S corporations
and their shareholders. This document
also provides notice of a public hearing
on these proposed regulations.
DATES: Written and electronic comments
must be received by November 4, 2008.
Outlines of topics to be discussed at the
public hearing scheduled for December
8, 2008, must be received by November
4, 2008.
ADDRESSES: Send submissions to
CC:PA:LPD:PR (REG–102822–08), Room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be handdelivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–102822–08),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC, or sent
electronically via the Federal
eRulemaking Portal at
www.regulations.gov/ (IRS REG–
102822–08). The public hearing will be
held in the IRS Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC.
E:\FR\FM\06AUP1.SGM
06AUP1
Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules
FOR FURTHER INFORMATION CONTACT:
yshivers on PROD1PC62 with PROPOSALS
Concerning the proposed regulations,
Jennifer N. Keeney, (202) 622–3060;
concerning submissions of comments,
the hearing, or to be placed on the
building access list to attend the
hearing, Funmi Taylor, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information
contained in this notice of proposed
rulemaking have been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collections of information should be
sent to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224. Comments on the collection of
information should be received by
November 4, 2008. Comments are
specifically requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collections of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of service to provide
information.
The collection of information in these
proposed regulations is in § 1.108–
7(d)(4). This information must be
provided by both the S corporations that
exclude discharge of indebtedness
income from gross income under section
108(a) and the shareholders of those S
corporations. The information will be
used by the S corporation to properly
reduce its tax attributes under section
108(b), and the information will be used
by the shareholders of S corporations to
calculate their taxable income in
succeeding taxable years. The
respondents will be S corporations and
their shareholders.
VerDate Aug<31>2005
15:30 Aug 05, 2008
Jkt 214001
Estimated total annual reporting
burden: 1,000 hours.
Estimated average annual burden
hours per respondent: 1 hour.
Estimated number of respondents:
1,000.
Estimated annual frequency of
responses: On occasion.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Books or records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and return information are
confidential, as required by 26 U.S.C.
6103.
Background
This document contains proposed
amendments to 26 CFR part 1 under
section 108 of the Internal Revenue
Code (Code). Section 61(a) provides that
gross income means all income from
whatever source derived, including (but
not limited to) income from discharge of
indebtedness, also known as
cancellation of debt (COD income).
Section 108(a) provides an exclusion
from gross income for COD income if
the discharge occurs while the taxpayer
is bankrupt or insolvent, or if the
indebtedness discharged is qualified
farm indebtedness, certain qualified real
property business indebtedness, or
certain qualified principal residence
indebtedness. In the case of a discharge
of indebtedness during insolvency, the
exclusion from income is limited to the
amount by which the taxpayer is
insolvent. Section 108(b) provides that
the taxpayer must reduce certain
specified tax attributes to the extent
COD income is excluded under section
108(a)(1)(A), (B), or (C). Section 108(b)
also provides the order in which these
tax attributes must be reduced. Unless
the taxpayer makes an election under
section 108(b)(5) to first reduce the basis
of depreciable property, section
108(b)(2)(A) provides that the first tax
attribute to be reduced is any net
operating loss for the taxable year of the
discharge, and any net operating loss
carryover to such taxable year.
Explanation of Provisions
A. Allocation of Excess Losses and
Deductions After Section 108(b) Tax
Attribute Reduction
Section 108 provides special rules for
an S corporation that has COD income.
Section 108(d)(7)(A), as amended by the
PO 00000
Frm 00023
Fmt 4702
Sfmt 4702
45657
Job Creation and Worker Assistance Act
of 2002, Public Law 107–147, provides,
in part, that the rules under section
108(a) for the exclusion of COD income
and under section 108(b) for the
reduction of tax attributes are applied at
the corporate level, including by not
taking into account under section
1366(a) any amount excluded under
section 108(a). Therefore, if an S
corporation excludes COD income from
its gross income under section 108(a),
the amount excluded is applied to
reduce the S corporation’s tax attributes
under section 108(b)(2). Under section
108(b)(4)(A), the reduction of tax
attributes occurs after the S
corporation’s items of income, loss,
deduction and credit for the taxable year
of the discharge pass through to its
shareholders under section 1366(a).
Under section 1366(d)(1), the aggregate
amount of losses and deductions a
shareholder can take into account under
section 1366(a) cannot exceed the
shareholder’s adjusted basis in the
shareholder’s stock in the S corporation
and the shareholder’s adjusted basis of
any indebtedness of the S corporation to
the shareholder. For purposes of the tax
attribute reduction rule under section
108(b)(2), any loss or deduction that is
disallowed for the taxable year of the
discharge under section 1366(d)(1) is
treated as a net operating loss of the S
corporation under section 108(d)(7)(B)
(deemed NOL). The proposed
regulations clarify that the S
corporation’s deemed NOL includes all
losses and deductions disallowed under
section 1366(d)(1) for the taxable year of
the discharge, including disallowed
losses and deductions of a shareholder
that had transferred all of the
shareholder’s stock in the S corporation
during such year.
If the amount of the S corporation’s
deemed NOL exceeds the amount of
excluded COD income, the proposed
regulations provide that the S
corporation’s excess deemed NOL is
allocated to the shareholder or
shareholders of the S corporation as
losses and deductions disallowed under
section 1366(d)(1) for the taxable year of
the discharge. If an S corporation has
more than one shareholder during the
taxable year of the discharge, the
proposed regulations provide a rule for
determining the amount of excess
deemed NOL allocated to each
shareholder. The allocation rule in the
proposed regulations takes into account
the amount of each shareholder’s
disallowed losses or deductions under
section 1366(d)(1) (before the tax
attribute reduction under section
108(b)(2)) and the amount of excluded
E:\FR\FM\06AUP1.SGM
06AUP1
45658
Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules
yshivers on PROD1PC62 with PROPOSALS
COD income that would have been
taken into account by each shareholder
under section 1366(a) had the COD
income not been excluded under section
108(a). This allocation method
alleviates, within the parameters of
section 108(d)(7)(B), the disparate
treatment that could occur where the
shareholders’ respective disallowed
losses or deductions under section
1366(d)(1) that are treated as the S
corporation’s deemed NOL are
disproportionate to the shareholders’
respective ownership interests. The IRS
and the Treasury Department recognize
that shareholders may be
disproportionately impacted where the
shareholders’ respective disallowed
losses or deductions are
disproportionate to their respective
ownership interests. The IRS and the
Treasury Department request comments
on alternative mechanisms that could
address such disproportionate economic
effects and on the collateral
consequences of such mechanisms.
The proposed regulations also provide
that any amount of the S corporation’s
excess deemed NOL that is allocated
under this allocation method to a
shareholder that had transferred all of
the shareholder’s stock in the S
corporation during the year of the
discharge is treated as a disallowed loss
or deduction that is permanently
disallowed under § 1.1366–2(a)(5) of the
Income Tax Regulations, unless the
transfer is described in section 1041(a).
B. Character of Excess Deemed NOL
Allocated to a Shareholder
A shareholder’s losses or deductions
disallowed under section 1366(d)(1)
consist of a pro rata share of the total
losses and deductions allocated to the
shareholder under section 1366(a)
during the corporation’s taxable year
(including losses and deductions
disallowed under section 1366(d)(1) for
prior years that are treated as current
year losses and deductions with respect
to the shareholder under section
1366(d)(2)). The character of any item
included in a shareholder’s pro rata
share under section 1366(a) is
determined as if such item were realized
directly from the source from which it
was realized by the S corporation, or
incurred in the same manner as
incurred by the corporation. The items
of income, loss, or deduction that pass
through to a shareholder, and that
comprise a shareholder’s suspended
loss or deduction under section
1366(d)(1), retain their character (for
example, ordinary deduction, long-term
capital loss).
Section 108(d)(7)(B) does not address
potential character differences that may
VerDate Aug<31>2005
15:30 Aug 05, 2008
Jkt 214001
exist in a shareholder’s disallowed
losses or deductions under section
1366(d)(1) that are included in the S
corporation’s deemed NOL. Under the
general rules of section 108(b)(2), a
taxpayer’s net operating loss is reduced
before any other tax attributes, such as
capital loss carryovers. Therefore, to be
consistent with the ordering rule in
section 108(b)(2), the proposed
regulations provide that in determining
the character of the amount of the S
corporation’s excess deemed NOL that
is allocated to a shareholder, any
ordinary loss or deduction that was
disallowed under section 1366(d)(1) and
that was included in the S corporation’s
deemed NOL is treated as reduced
before any capital loss that was
disallowed under section 1366(d)(1) and
that was included in the S corporation’s
deemed NOL. With respect to section
1231 losses, where it is uncertain
whether the loss ultimately will be
characterized as ordinary or capital, the
proposed regulations provide that any
section 1231 loss or deduction that was
disallowed under section 1366(d)(1) and
that was included in the S corporation’s
deemed NOL is treated as reduced after
any ordinary loss and before any capital
loss.
C. Information Sharing Requirements
An S corporation shareholder
determines the amount of any
suspended loss or deduction under
section 1366(d)(1) for a taxable year. If
the shareholder has a suspended loss or
deduction under section 1366(d)(1), the
shareholder maintains a record of the
carryover loss or deduction amount.
Because any suspended loss or
deduction under section 1366(d)(1) is
treated as a net operating loss of the S
corporation for purposes of the tax
attribute reduction rule under section
108(b)(2), the S corporation will need to
know the amount of each shareholder’s
suspended loss or deduction under
section 1366(d)(1). The proposed
regulations require shareholders of an S
corporation that excludes COD income
from its gross income in a taxable year
to provide this information to the S
corporation. In addition, because each
shareholder will need to know the
amount of the shareholder’s disallowed
losses or deductions remaining after the
tax attribute reduction, the proposed
regulations require the S corporation to
provide to its shareholders the amount
of any excess deemed NOL that is
allocated to a shareholder after the tax
attribute reduction, even if such amount
is zero. The IRS and the Treasury
Department request comments on
whether the information sharing
requirements in the proposed
PO 00000
Frm 00024
Fmt 4702
Sfmt 4702
regulations are necessary or overly
burdensome and on whether special
rules are needed if shareholders fail to
provide the required information to the
S corporation.
Proposed Effective Date
These regulations are proposed to
apply to discharges of indebtedness
occurring on or after the date these
regulations are published as final
regulations in the Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. It is hereby
certified that the collection of
information contained in these
regulations will not have a significant
economic impact on a substantial
number of small entities. This
certification is based on the fact that the
collection burden imposed on S
corporations and their shareholders is
minimal in that it requires S
corporations and their shareholder(s) to
share information that shareholders
already maintain to determine their
respective tax liability. Moreover, it
should take an S corporation or a
shareholder no more than one hour to
satisfy the information sharing
requirements in these regulations.
Finally, the collection burden imposed
applies only to S corporations that are
required to reduce their tax attributes
under section 108(b) of the Code—a
group estimated to be less than 1
percent of all existing S corporations.
Therefore, a regulatory flexibility
analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Pursuant to section 7805(f)
of the Code, this regulation has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written (a signed original and eight (8)
copies) or electronic comments that are
submitted timely to the IRS. The IRS
and the Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier
to understand. All comments will be
available for public inspection and
copying.
E:\FR\FM\06AUP1.SGM
06AUP1
Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules
A public hearing has been scheduled
for December 8, 2008, beginning at 10
a.m. in the auditorium of the Internal
Revenue Building, 1111 Constitution
Avenue, NW., Washington, DC. Due to
building security procedures, visitors
must enter at the Constitution Avenue
entrance. In addition, all visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
Internal Revenue Building lobby more
than 30 minutes before the hearing
starts. For information about having
your name placed on the building
access list to attend the hearing, see the
FOR FURTHER INFORMATION CONTACT
section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing. Persons who wish
to present oral comments at the hearing
must submit written or electronic
comments by November 4, 2008 and
submit an outline of the topics to be
discussed and the time to be devoted to
each topic (signed original and eight (8)
copies) by November 4, 2008. A period
of 10 minutes will be allotted to each
person for making comments. An
agenda showing the schedule of
speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these
regulations is Jennifer N. Keeney, Office
of the Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
yshivers on PROD1PC62 with PROPOSALS
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.108–7 is amended
by:
1. Redesignating paragraphs (d) and
(e) as paragraphs (e) and (f),
respectively.
2. Adding new paragraph (d).
3. Adding paragraph (e) Example 5
and Example 6 to newly-redesignated
paragraph (e).
VerDate Aug<31>2005
15:30 Aug 05, 2008
Jkt 214001
4. Revising newly-redesignated
paragraph (f).
The additions and revision read as
follows:
§ 1.108–7
Reduction of attributes.
*
*
*
*
*
(d) Special rules for S corporations—
(1) In general. If an S corporation
excludes COD income from gross
income under section 108(a)(1)(A), (B),
or (C), the amount excluded shall be
applied to reduce the S corporation’s tax
attributes under paragraph (a)(1) of this
section. For purposes of paragraph
(a)(1)(i) of this section, the aggregate
amount of the shareholders’ losses or
deductions that are disallowed for the
taxable year of the discharge under
section 1366(d)(1), including disallowed
losses or deductions of a shareholder
that transfers all of the shareholder’s
stock in the S corporation during the
taxable year of the discharge, is treated
as the net operating loss tax attribute
(deemed NOL) of the S corporation for
the taxable year of the discharge.
(2) Allocation of excess losses or
deductions—(i) In general. If the amount
of an S corporation’s deemed NOL
exceeds the amount of the S
corporation’s COD income that is
excluded from gross income under
section 108(a)(1)(A), (B), or (C), the
excess deemed NOL shall be allocated
to the shareholder or shareholders of the
S corporation as a loss or deduction that
is disallowed under section 1366(d) for
the taxable year of the discharge.
(ii) Multiple shareholders—(A) In
general. If an S corporation has multiple
shareholders, to determine the amount
of the S corporation’s excess deemed
NOL to be allocated to each shareholder
under paragraph (d)(2)(i) of this section,
calculate with respect to each
shareholder the shareholder’s excess
amount. The shareholder’s excess
amount is the amount (if any) by which
the shareholder’s losses or deductions
disallowed under section 1366(d)(1)
(before any reduction under paragraph
(a)(1) of this section) exceed the amount
of COD income that would have been
taken into account by that shareholder
under section 1366(a) had the COD
income not been excluded under section
108(a).
(B) Shareholders with a shareholder’s
excess amount. Each shareholder that
has a shareholder’s excess amount, as
determined under paragraph
(d)(2)(ii)(A) of this section, is allocated
an amount equal to the S corporation’s
excess deemed NOL multiplied by a
fraction, the numerator of which is the
shareholder’s excess amount and the
denominator of which is the sum of all
shareholders’ excess amounts.
PO 00000
Frm 00025
Fmt 4702
Sfmt 4702
45659
(C) Shareholders with no
shareholder’s excess amount. If a
shareholder does not have a
shareholder’s excess amount as
determined in paragraph (d)(2)(ii)(A) of
this section, none of the S corporation’s
excess deemed NOL shall be allocated
to that shareholder.
(iii) Terminating shareholder. Any
amount of the S corporation’s excess
deemed NOL allocated under paragraph
(d)(2) of this section to a shareholder
that had transferred all of the
shareholder’s stock in the corporation
during the taxable year of the discharge
is permanently disallowed under
§ 1.1366–2(a)(5), unless the transfer of
stock is described in section 1041(a). If
the transfer of stock is described in
section 1041(a), the amount of the S
corporation’s excess deemed NOL
allocated to the transferor under
paragraph (d)(2) of this section shall be
treated as a loss or deduction incurred
by the corporation in the succeeding
taxable year with respect to the
transferee. See section 1366(d)(2)(B).
(3) Character of excess losses or
deductions allocated to a shareholder.
In determining the character of the
amount of the S corporation’s excess
deemed NOL allocated to a shareholder
under paragraph (d)(2) of this section,
any ordinary loss or deduction that was
included in the shareholder’s aggregate
amount of disallowed losses or
deductions under section 1366(d)(1) is
treated as reduced under section 108(b)
before any section 1231 loss that was
included in the shareholder’s aggregate
amount of disallowed losses or
deductions under section 1366(d)(1),
and any section 1231 loss is treated as
reduced under section 108(b) before any
capital loss that was included in the
shareholder’s aggregate amount of
disallowed losses or deductions under
section 1366(d)(1).
(4) Information requirements. If an S
corporation excludes COD income from
gross income under section 108(a) for a
taxable year, each shareholder of the S
corporation during the taxable year of
the discharge must provide to the S
corporation the amount of the
shareholder’s losses and deductions that
are disallowed for the taxable year of the
discharge under section 1366(d)(1). The
S corporation must provide to each
shareholder the amount of any of the S
corporation’s excess deemed NOL that
is allocated to that shareholder under
paragraph (d)(2) of this section, even if
that amount is zero.
(e) * * *
Example 5. (i) Facts. During the entire
calendar year 2008, A, B, and C each own
equal shares of stock in X, a calendar year S
corporation. As of December 31, 2008, A, B,
E:\FR\FM\06AUP1.SGM
06AUP1
yshivers on PROD1PC62 with PROPOSALS
45660
Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules
and C each have a zero stock basis and X
does not have any indebtedness to A, B, or
C. For the 2008 taxable year, X excludes from
gross income $30,000 of COD income under
section 108(a)(1)(A). The COD income (had it
not been excluded) would have been
allocated $10,000 to A, $10,000 to B, and
$10,000 to C under section 1366(a). For the
2008 taxable year, X has $30,000 of losses
and deductions that X passes through prorata to A, B, and C in the amount of $10,000
each. The losses and deductions that pass
through to A, B, and C are disallowed under
section 1366(d)(1). In addition, B has $10,000
of section 1366(d) losses from prior years and
C has $20,000 from prior years. A’s ($10,000),
B’s ($20,000) and C’s ($30,000) combined
$60,000 of disallowed losses and deductions
for the taxable year of the discharge are
treated as a current year net operating loss
tax attribute for X under section 108(d)(7)(B)
(deemed NOL) for purposes of the section
108(b) reduction of tax attributes.
(ii) Allocation. Under section 108(b)(2)(A),
X’s $30,000 of excluded COD income reduces
this $60,000 deemed NOL to $30,000.
Therefore, X has a $30,000 excess net
operating loss (excess deemed NOL) to
allocate to the shareholders. Under paragraph
(d)(2)(ii)(C) of this section, none of the
$30,000 excess deemed NOL is allocated to
A because A’s section 1366(d) losses and
deductions immediately prior to the section
108(b)(2)(A) reduction ($10,000) do not
exceed A’s share of the excluded COD
income for 2008 ($10,000). Thus, A has no
shareholder’s excess amount. Each of B’s and
C’s respective section 1366(d) losses and
deductions immediately prior to the section
108(b)(2)(A) reduction exceed each of B’s and
C’s respective shares of the excluded COD
income for 2008. B’s excess amount is
$10,000 ($20,000 ¥ $10,000) and C’s excess
amount is $20,000 ($30,000 ¥ $10,000).
Therefore, the total of all shareholders’
excess amounts is $30,000. Under paragraph
(d)(2) of this section, X will allocate $10,000
of the $30,000 excess deemed NOL to B
($30,000 × $10,000/$30,000) and $20,000 of
the $30,000 excess deemed NOL to C
($30,000 × $20,000/$30,000). These amounts
are treated as losses and deductions
disallowed under section 1366(d)(1) for the
taxable year of the discharge. Accordingly, at
the beginning of 2009, A has no section
1366(d)(2) carryovers, B has $10,000 of
carryovers, and C has $20,000 of carryovers.
(iii) Character. Immediately prior to the
section 108(b)(2)(A) reduction, B’s $20,000 of
section 1366(d) losses and deductions
consisted of $8,000 of long-term capital
losses, $7,000 of section 1231 losses, and
$5,000 of ordinary losses. After the section
108(b)(2)(A) tax attribute reduction, X will
allocate $10,000 of the excess deemed NOL
to B. Under paragraph (d)(3) of this section,
the $5,000 of ordinary losses are treated as
reduced first, followed by $5,000 of section
1231 losses. Accordingly, the $10,000 of
losses allocated to B consist of the remaining
$2,000 of section 1231 losses and $8,000 of
long-term capital losses. As a result, at the
beginning of 2009, B’s $10,000 of section
1366(d)(2) carryovers include $2,000 of
section 1231 losses and $8,000 of long-term
capital losses.
VerDate Aug<31>2005
15:30 Aug 05, 2008
Jkt 214001
Example 6. (i) A and B each own 50
percent of the shares of stock in X, a calendar
year S corporation. On June 30, 2008, A sells
all of her shares of stock in X to C in a
transfer not described in section 1041(a). For
the 2008 taxable year, X excludes from gross
income $12,000 of COD income under
section 108(a)(1)(A). The COD income (had it
not been excluded) would have been
allocated $3,000 to A, $6,000 to B, and
$3,000 to C under section 1366(a). Prior to
the section 108(b)(2)(A) reduction, for the
taxable year of the discharge the shareholders
have disallowed losses and deductions under
section 1366(d) (including disallowed losses
carried over to the current year under section
1366(d)(2)) in the following amounts: A—
$9,000, B—$9,000, and C—$2,000. These
combined $20,000 of disallowed losses and
deductions for the taxable year of the
discharge are treated as a current year net
operating loss tax attribute for X under
section 108(d)(7)(B) (deemed NOL).
(ii) Under section 108(b)(2)(A), X’s $12,000
of excluded COD income reduces the $20,000
deemed NOL to $8,000. Therefore, X has an
$8,000 excess net operating loss (excess
deemed NOL) to allocate to the shareholders.
Under paragraph (d)(2)(ii)(C) of this section,
none of the $8,000 excess deemed NOL is
allocated to C because C’s section 1366(d)
losses and deductions immediately prior to
the section 108(b)(2)(A) reduction ($2,000) do
not exceed C’s share of the excluded COD
income for 2008 ($3,000). However, each of
A’s and B’s respective section 1366(d) losses
and deductions immediately prior to the
section 108(b)(2)(A) reduction exceed each of
A’s and B’s respective shares of the excluded
COD income for 2008. A’s excess amount is
$6,000 ($9,000¥$3,000) and B’s excess
amount is $3,000 ($9,000¥$6,000).
Therefore, the total of all shareholders’
excess amounts is $9,000. Under paragraph
(d)(2) of this section, X will allocate $5,333
of the $8,000 excess deemed NOL to A
($8,000 × $6,000/$9,000) and $2,667 of the
$8,000 excess deemed NOL to B ($8,000 ×
$3,000/$9,000). However, because A
transferred all of her shares of stock in X in
a transaction not described in section
1041(a), A’s $5,333 of section 1366(d) losses
and deductions are permanently disallowed
under paragraph (d)(2)(iii) of this section.
Accordingly, at the beginning of 2009, B has
$2,667 of section 1366(d)(2) carryovers and C
has no section 1366(d)(2) carryovers.
(f) Effective/applicability date—(1)
Paragraphs (a), (b), (c), and Examples 1,
2, 3, and 4 of paragraph (e) of this
section apply to discharges of
indebtedness occurring on or after May
10, 2004.
(2) Paragraph (d) and Examples 5 and
6 of paragraph (e) of this section apply
to discharges of indebtedness occurring
on or after the date that these
regulations are published as final
regulations in the Federal Register.
Linda E. Stiff,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. E8–17952 Filed 8–5–08; 8:45 am]
BILLING CODE 4830–01–P
PO 00000
Frm 00026
Fmt 4702
Sfmt 4702
FEDERAL MEDIATION AND
CONCILIATION SERVICE
29 CFR Part 1404
RIN 3076–AA12
Arbitration Services
Federal Mediation and
Conciliation Service.
ACTION: Notice of proposed rulemaking.
AGENCY:
SUMMARY: The Federal Mediation and
Conciliation Service (FMCS) proposes to
amend its rules relating to arbitrators’
inactive status, removal, appointment,
referral and obligation to provide FMCS
with information. The proposed rules
also address the appointment of
arbitrators where a party has failed to
pay fees in previous cases. In addition,
the proposed rules raise the annual
listing fee for arbitrators on the FMCS
Roster. The changes will promote more
efficient and effective procedures
involving arbitrator retention and
arbitration services. The increased cost
of listing arbitrator biographical data
more accurately reflects FMCS’ costs of
maintaining and administering this
information.
DATES: Comments must be submitted to
the office listed in the address section
below on or before October 6, 2008.
ADDRESSES: Submit written comments,
identified by RIN number, by mail to
Vella M. Traynham, Director, Office of
Arbitration Services, FMCS, 2100 K
Street, NW., Washington, DC 20427.
Comments may be submitted by fax to
(202) 606–3749. Comments may also be
submitted electronically to
vtraynham@fmcs.gov. All comments
will be available for inspection in Room
704 at the Washington, DC address
above from 8:30 a.m. to 4:30 p.m.
Monday through Friday, excluding legal
holidays.
FOR FURTHER INFORMATION CONTACT:
Vella M. Traynham, Director, Office of
Arbitration Services, FMCS, 2100 K
Street, NW., Washington, DC 20427.
Telephone: (202) 606–5111.
SUPPLEMENTARY INFORMATION: Pursuant
to 29 U.S.C. 171(b) and 29 CFR Part
1404, FMCS maintains a Roster of
qualified labor arbitrators to hear
disputes arising from collective
bargaining agreements and to provide
fact finding and interest arbitration.
FMCS proposes to amend its rules
pertaining to arbitration services by
revising: the arbitrator complaint
process; circumstances applicable to
inactive arbitrator status; procedures for
the request of arbitration panels; the
obligation of arbitrators to provide
FMCS with designated information; and
E:\FR\FM\06AUP1.SGM
06AUP1
]]>Agencies
[Federal Register Volume 73, Number 152 (Wednesday, August 6, 2008)]
[Proposed Rules]
[Pages 45656-45660]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-17952]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-102822-08]
RIN 1545-BH54
Section 108 Reduction of Tax Attributes for S Corporations
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations that provide
guidance on the manner in which an S corporation reduces its tax
attributes under section 108(b) for taxable years in which the S
corporation has discharge of indebtedness income that is excluded from
gross income under section 108(a). In particular, the regulations
address situations in which the aggregate amount of the shareholders'
disallowed section 1366(d) losses and deductions that are treated as a
net operating loss tax attribute of the S corporation exceeds the
amount of the S corporation's excluded discharge of indebtedness
income. The proposed regulations will affect S corporations and their
shareholders. This document also provides notice of a public hearing on
these proposed regulations.
DATES: Written and electronic comments must be received by November 4,
2008. Outlines of topics to be discussed at the public hearing
scheduled for December 8, 2008, must be received by November 4, 2008.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-102822-08), Room 5203,
Internal Revenue Service, PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
102822-08), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov/ (IRS REG-102822-08). The
public hearing will be held in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC.
[[Page 45657]]
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Jennifer N. Keeney, (202) 622-3060; concerning submissions of comments,
the hearing, or to be placed on the building access list to attend the
hearing, Funmi Taylor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in this notice of proposed
rulemaking have been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collections of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP,
Washington, DC 20224. Comments on the collection of information should
be received by November 4, 2008. Comments are specifically requested
concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information;
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collections of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in these proposed regulations is in
Sec. 1.108-7(d)(4). This information must be provided by both the S
corporations that exclude discharge of indebtedness income from gross
income under section 108(a) and the shareholders of those S
corporations. The information will be used by the S corporation to
properly reduce its tax attributes under section 108(b), and the
information will be used by the shareholders of S corporations to
calculate their taxable income in succeeding taxable years. The
respondents will be S corporations and their shareholders.
Estimated total annual reporting burden: 1,000 hours.
Estimated average annual burden hours per respondent: 1 hour.
Estimated number of respondents: 1,000.
Estimated annual frequency of responses: On occasion.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to 26 CFR part 1 under
section 108 of the Internal Revenue Code (Code). Section 61(a) provides
that gross income means all income from whatever source derived,
including (but not limited to) income from discharge of indebtedness,
also known as cancellation of debt (COD income). Section 108(a)
provides an exclusion from gross income for COD income if the discharge
occurs while the taxpayer is bankrupt or insolvent, or if the
indebtedness discharged is qualified farm indebtedness, certain
qualified real property business indebtedness, or certain qualified
principal residence indebtedness. In the case of a discharge of
indebtedness during insolvency, the exclusion from income is limited to
the amount by which the taxpayer is insolvent. Section 108(b) provides
that the taxpayer must reduce certain specified tax attributes to the
extent COD income is excluded under section 108(a)(1)(A), (B), or (C).
Section 108(b) also provides the order in which these tax attributes
must be reduced. Unless the taxpayer makes an election under section
108(b)(5) to first reduce the basis of depreciable property, section
108(b)(2)(A) provides that the first tax attribute to be reduced is any
net operating loss for the taxable year of the discharge, and any net
operating loss carryover to such taxable year.
Explanation of Provisions
A. Allocation of Excess Losses and Deductions After Section 108(b) Tax
Attribute Reduction
Section 108 provides special rules for an S corporation that has
COD income. Section 108(d)(7)(A), as amended by the Job Creation and
Worker Assistance Act of 2002, Public Law 107-147, provides, in part,
that the rules under section 108(a) for the exclusion of COD income and
under section 108(b) for the reduction of tax attributes are applied at
the corporate level, including by not taking into account under section
1366(a) any amount excluded under section 108(a). Therefore, if an S
corporation excludes COD income from its gross income under section
108(a), the amount excluded is applied to reduce the S corporation's
tax attributes under section 108(b)(2). Under section 108(b)(4)(A), the
reduction of tax attributes occurs after the S corporation's items of
income, loss, deduction and credit for the taxable year of the
discharge pass through to its shareholders under section 1366(a). Under
section 1366(d)(1), the aggregate amount of losses and deductions a
shareholder can take into account under section 1366(a) cannot exceed
the shareholder's adjusted basis in the shareholder's stock in the S
corporation and the shareholder's adjusted basis of any indebtedness of
the S corporation to the shareholder. For purposes of the tax attribute
reduction rule under section 108(b)(2), any loss or deduction that is
disallowed for the taxable year of the discharge under section
1366(d)(1) is treated as a net operating loss of the S corporation
under section 108(d)(7)(B) (deemed NOL). The proposed regulations
clarify that the S corporation's deemed NOL includes all losses and
deductions disallowed under section 1366(d)(1) for the taxable year of
the discharge, including disallowed losses and deductions of a
shareholder that had transferred all of the shareholder's stock in the
S corporation during such year.
If the amount of the S corporation's deemed NOL exceeds the amount
of excluded COD income, the proposed regulations provide that the S
corporation's excess deemed NOL is allocated to the shareholder or
shareholders of the S corporation as losses and deductions disallowed
under section 1366(d)(1) for the taxable year of the discharge. If an S
corporation has more than one shareholder during the taxable year of
the discharge, the proposed regulations provide a rule for determining
the amount of excess deemed NOL allocated to each shareholder. The
allocation rule in the proposed regulations takes into account the
amount of each shareholder's disallowed losses or deductions under
section 1366(d)(1) (before the tax attribute reduction under section
108(b)(2)) and the amount of excluded
[[Page 45658]]
COD income that would have been taken into account by each shareholder
under section 1366(a) had the COD income not been excluded under
section 108(a). This allocation method alleviates, within the
parameters of section 108(d)(7)(B), the disparate treatment that could
occur where the shareholders' respective disallowed losses or
deductions under section 1366(d)(1) that are treated as the S
corporation's deemed NOL are disproportionate to the shareholders'
respective ownership interests. The IRS and the Treasury Department
recognize that shareholders may be disproportionately impacted where
the shareholders' respective disallowed losses or deductions are
disproportionate to their respective ownership interests. The IRS and
the Treasury Department request comments on alternative mechanisms that
could address such disproportionate economic effects and on the
collateral consequences of such mechanisms.
The proposed regulations also provide that any amount of the S
corporation's excess deemed NOL that is allocated under this allocation
method to a shareholder that had transferred all of the shareholder's
stock in the S corporation during the year of the discharge is treated
as a disallowed loss or deduction that is permanently disallowed under
Sec. 1.1366-2(a)(5) of the Income Tax Regulations, unless the transfer
is described in section 1041(a).
B. Character of Excess Deemed NOL Allocated to a Shareholder
A shareholder's losses or deductions disallowed under section
1366(d)(1) consist of a pro rata share of the total losses and
deductions allocated to the shareholder under section 1366(a) during
the corporation's taxable year (including losses and deductions
disallowed under section 1366(d)(1) for prior years that are treated as
current year losses and deductions with respect to the shareholder
under section 1366(d)(2)). The character of any item included in a
shareholder's pro rata share under section 1366(a) is determined as if
such item were realized directly from the source from which it was
realized by the S corporation, or incurred in the same manner as
incurred by the corporation. The items of income, loss, or deduction
that pass through to a shareholder, and that comprise a shareholder's
suspended loss or deduction under section 1366(d)(1), retain their
character (for example, ordinary deduction, long-term capital loss).
Section 108(d)(7)(B) does not address potential character
differences that may exist in a shareholder's disallowed losses or
deductions under section 1366(d)(1) that are included in the S
corporation's deemed NOL. Under the general rules of section 108(b)(2),
a taxpayer's net operating loss is reduced before any other tax
attributes, such as capital loss carryovers. Therefore, to be
consistent with the ordering rule in section 108(b)(2), the proposed
regulations provide that in determining the character of the amount of
the S corporation's excess deemed NOL that is allocated to a
shareholder, any ordinary loss or deduction that was disallowed under
section 1366(d)(1) and that was included in the S corporation's deemed
NOL is treated as reduced before any capital loss that was disallowed
under section 1366(d)(1) and that was included in the S corporation's
deemed NOL. With respect to section 1231 losses, where it is uncertain
whether the loss ultimately will be characterized as ordinary or
capital, the proposed regulations provide that any section 1231 loss or
deduction that was disallowed under section 1366(d)(1) and that was
included in the S corporation's deemed NOL is treated as reduced after
any ordinary loss and before any capital loss.
C. Information Sharing Requirements
An S corporation shareholder determines the amount of any suspended
loss or deduction under section 1366(d)(1) for a taxable year. If the
shareholder has a suspended loss or deduction under section 1366(d)(1),
the shareholder maintains a record of the carryover loss or deduction
amount. Because any suspended loss or deduction under section
1366(d)(1) is treated as a net operating loss of the S corporation for
purposes of the tax attribute reduction rule under section 108(b)(2),
the S corporation will need to know the amount of each shareholder's
suspended loss or deduction under section 1366(d)(1). The proposed
regulations require shareholders of an S corporation that excludes COD
income from its gross income in a taxable year to provide this
information to the S corporation. In addition, because each shareholder
will need to know the amount of the shareholder's disallowed losses or
deductions remaining after the tax attribute reduction, the proposed
regulations require the S corporation to provide to its shareholders
the amount of any excess deemed NOL that is allocated to a shareholder
after the tax attribute reduction, even if such amount is zero. The IRS
and the Treasury Department request comments on whether the information
sharing requirements in the proposed regulations are necessary or
overly burdensome and on whether special rules are needed if
shareholders fail to provide the required information to the S
corporation.
Proposed Effective Date
These regulations are proposed to apply to discharges of
indebtedness occurring on or after the date these regulations are
published as final regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information contained in these
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based on
the fact that the collection burden imposed on S corporations and their
shareholders is minimal in that it requires S corporations and their
shareholder(s) to share information that shareholders already maintain
to determine their respective tax liability. Moreover, it should take
an S corporation or a shareholder no more than one hour to satisfy the
information sharing requirements in these regulations. Finally, the
collection burden imposed applies only to S corporations that are
required to reduce their tax attributes under section 108(b) of the
Code--a group estimated to be less than 1 percent of all existing S
corporations. Therefore, a regulatory flexibility analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.
Pursuant to section 7805(f) of the Code, this regulation has been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The IRS and the Treasury Department request comments on the
clarity of the proposed rules and how they can be made easier to
understand. All comments will be available for public inspection and
copying.
[[Page 45659]]
A public hearing has been scheduled for December 8, 2008, beginning
at 10 a.m. in the auditorium of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, all visitors must present photo identification to enter the
building. Because of access restrictions, visitors will not be admitted
beyond the Internal Revenue Building lobby more than 30 minutes before
the hearing starts. For information about having your name placed on
the building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written or
electronic comments by November 4, 2008 and submit an outline of the
topics to be discussed and the time to be devoted to each topic (signed
original and eight (8) copies) by November 4, 2008. A period of 10
minutes will be allotted to each person for making comments. An agenda
showing the schedule of speakers will be prepared after the deadline
for receiving outlines has passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Jennifer N. Keeney,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.108-7 is amended by:
1. Redesignating paragraphs (d) and (e) as paragraphs (e) and (f),
respectively.
2. Adding new paragraph (d).
3. Adding paragraph (e) Example 5 and Example 6 to newly-
redesignated paragraph (e).
4. Revising newly-redesignated paragraph (f).
The additions and revision read as follows:
Sec. 1.108-7 Reduction of attributes.
* * * * *
(d) Special rules for S corporations--(1) In general. If an S
corporation excludes COD income from gross income under section
108(a)(1)(A), (B), or (C), the amount excluded shall be applied to
reduce the S corporation's tax attributes under paragraph (a)(1) of
this section. For purposes of paragraph (a)(1)(i) of this section, the
aggregate amount of the shareholders' losses or deductions that are
disallowed for the taxable year of the discharge under section
1366(d)(1), including disallowed losses or deductions of a shareholder
that transfers all of the shareholder's stock in the S corporation
during the taxable year of the discharge, is treated as the net
operating loss tax attribute (deemed NOL) of the S corporation for the
taxable year of the discharge.
(2) Allocation of excess losses or deductions--(i) In general. If
the amount of an S corporation's deemed NOL exceeds the amount of the S
corporation's COD income that is excluded from gross income under
section 108(a)(1)(A), (B), or (C), the excess deemed NOL shall be
allocated to the shareholder or shareholders of the S corporation as a
loss or deduction that is disallowed under section 1366(d) for the
taxable year of the discharge.
(ii) Multiple shareholders--(A) In general. If an S corporation has
multiple shareholders, to determine the amount of the S corporation's
excess deemed NOL to be allocated to each shareholder under paragraph
(d)(2)(i) of this section, calculate with respect to each shareholder
the shareholder's excess amount. The shareholder's excess amount is the
amount (if any) by which the shareholder's losses or deductions
disallowed under section 1366(d)(1) (before any reduction under
paragraph (a)(1) of this section) exceed the amount of COD income that
would have been taken into account by that shareholder under section
1366(a) had the COD income not been excluded under section 108(a).
(B) Shareholders with a shareholder's excess amount. Each
shareholder that has a shareholder's excess amount, as determined under
paragraph (d)(2)(ii)(A) of this section, is allocated an amount equal
to the S corporation's excess deemed NOL multiplied by a fraction, the
numerator of which is the shareholder's excess amount and the
denominator of which is the sum of all shareholders' excess amounts.
(C) Shareholders with no shareholder's excess amount. If a
shareholder does not have a shareholder's excess amount as determined
in paragraph (d)(2)(ii)(A) of this section, none of the S corporation's
excess deemed NOL shall be allocated to that shareholder.
(iii) Terminating shareholder. Any amount of the S corporation's
excess deemed NOL allocated under paragraph (d)(2) of this section to a
shareholder that had transferred all of the shareholder's stock in the
corporation during the taxable year of the discharge is permanently
disallowed under Sec. 1.1366-2(a)(5), unless the transfer of stock is
described in section 1041(a). If the transfer of stock is described in
section 1041(a), the amount of the S corporation's excess deemed NOL
allocated to the transferor under paragraph (d)(2) of this section
shall be treated as a loss or deduction incurred by the corporation in
the succeeding taxable year with respect to the transferee. See section
1366(d)(2)(B).
(3) Character of excess losses or deductions allocated to a
shareholder. In determining the character of the amount of the S
corporation's excess deemed NOL allocated to a shareholder under
paragraph (d)(2) of this section, any ordinary loss or deduction that
was included in the shareholder's aggregate amount of disallowed losses
or deductions under section 1366(d)(1) is treated as reduced under
section 108(b) before any section 1231 loss that was included in the
shareholder's aggregate amount of disallowed losses or deductions under
section 1366(d)(1), and any section 1231 loss is treated as reduced
under section 108(b) before any capital loss that was included in the
shareholder's aggregate amount of disallowed losses or deductions under
section 1366(d)(1).
(4) Information requirements. If an S corporation excludes COD
income from gross income under section 108(a) for a taxable year, each
shareholder of the S corporation during the taxable year of the
discharge must provide to the S corporation the amount of the
shareholder's losses and deductions that are disallowed for the taxable
year of the discharge under section 1366(d)(1). The S corporation must
provide to each shareholder the amount of any of the S corporation's
excess deemed NOL that is allocated to that shareholder under paragraph
(d)(2) of this section, even if that amount is zero.
(e) * * *
Example 5. (i) Facts. During the entire calendar year 2008, A,
B, and C each own equal shares of stock in X, a calendar year S
corporation. As of December 31, 2008, A, B,
[[Page 45660]]
and C each have a zero stock basis and X does not have any
indebtedness to A, B, or C. For the 2008 taxable year, X excludes
from gross income $30,000 of COD income under section 108(a)(1)(A).
The COD income (had it not been excluded) would have been allocated
$10,000 to A, $10,000 to B, and $10,000 to C under section 1366(a).
For the 2008 taxable year, X has $30,000 of losses and deductions
that X passes through pro-rata to A, B, and C in the amount of
$10,000 each. The losses and deductions that pass through to A, B,
and C are disallowed under section 1366(d)(1). In addition, B has
$10,000 of section 1366(d) losses from prior years and C has $20,000
from prior years. A's ($10,000), B's ($20,000) and C's ($30,000)
combined $60,000 of disallowed losses and deductions for the taxable
year of the discharge are treated as a current year net operating
loss tax attribute for X under section 108(d)(7)(B) (deemed NOL) for
purposes of the section 108(b) reduction of tax attributes.
(ii) Allocation. Under section 108(b)(2)(A), X's $30,000 of
excluded COD income reduces this $60,000 deemed NOL to $30,000.
Therefore, X has a $30,000 excess net operating loss (excess deemed
NOL) to allocate to the shareholders. Under paragraph (d)(2)(ii)(C)
of this section, none of the $30,000 excess deemed NOL is allocated
to A because A's section 1366(d) losses and deductions immediately
prior to the section 108(b)(2)(A) reduction ($10,000) do not exceed
A's share of the excluded COD income for 2008 ($10,000). Thus, A has
no shareholder's excess amount. Each of B's and C's respective
section 1366(d) losses and deductions immediately prior to the
section 108(b)(2)(A) reduction exceed each of B's and C's respective
shares of the excluded COD income for 2008. B's excess amount is
$10,000 ($20,000 - $10,000) and C's excess amount is $20,000
($30,000 - $10,000). Therefore, the total of all shareholders'
excess amounts is $30,000. Under paragraph (d)(2) of this section, X
will allocate $10,000 of the $30,000 excess deemed NOL to B ($30,000
x $10,000/$30,000) and $20,000 of the $30,000 excess deemed NOL to C
($30,000 x $20,000/$30,000). These amounts are treated as losses and
deductions disallowed under section 1366(d)(1) for the taxable year
of the discharge. Accordingly, at the beginning of 2009, A has no
section 1366(d)(2) carryovers, B has $10,000 of carryovers, and C
has $20,000 of carryovers.
(iii) Character. Immediately prior to the section 108(b)(2)(A)
reduction, B's $20,000 of section 1366(d) losses and deductions
consisted of $8,000 of long-term capital losses, $7,000 of section
1231 losses, and $5,000 of ordinary losses. After the section
108(b)(2)(A) tax attribute reduction, X will allocate $10,000 of the
excess deemed NOL to B. Under paragraph (d)(3) of this section, the
$5,000 of ordinary losses are treated as reduced first, followed by
$5,000 of section 1231 losses. Accordingly, the $10,000 of losses
allocated to B consist of the remaining $2,000 of section 1231
losses and $8,000 of long-term capital losses. As a result, at the
beginning of 2009, B's $10,000 of section 1366(d)(2) carryovers
include $2,000 of section 1231 losses and $8,000 of long-term
capital losses.
Example 6. (i) A and B each own 50 percent of the shares of
stock in X, a calendar year S corporation. On June 30, 2008, A sells
all of her shares of stock in X to C in a transfer not described in
section 1041(a). For the 2008 taxable year, X excludes from gross
income $12,000 of COD income under section 108(a)(1)(A). The COD
income (had it not been excluded) would have been allocated $3,000
to A, $6,000 to B, and $3,000 to C under section 1366(a). Prior to
the section 108(b)(2)(A) reduction, for the taxable year of the
discharge the shareholders have disallowed losses and deductions
under section 1366(d) (including disallowed losses carried over to
the current year under section 1366(d)(2)) in the following amounts:
A--$9,000, B--$9,000, and C--$2,000. These combined $20,000 of
disallowed losses and deductions for the taxable year of the
discharge are treated as a current year net operating loss tax
attribute for X under section 108(d)(7)(B) (deemed NOL).
(ii) Under section 108(b)(2)(A), X's $12,000 of excluded COD
income reduces the $20,000 deemed NOL to $8,000. Therefore, X has an
$8,000 excess net operating loss (excess deemed NOL) to allocate to
the shareholders. Under paragraph (d)(2)(ii)(C) of this section,
none of the $8,000 excess deemed NOL is allocated to C because C's
section 1366(d) losses and deductions immediately prior to the
section 108(b)(2)(A) reduction ($2,000) do not exceed C's share of
the excluded COD income for 2008 ($3,000). However, each of A's and
B's respective section 1366(d) losses and deductions immediately
prior to the section 108(b)(2)(A) reduction exceed each of A's and
B's respective shares of the excluded COD income for 2008. A's
excess amount is $6,000 ($9,000-$3,000) and B's excess amount is
$3,000 ($9,000-$6,000). Therefore, the total of all shareholders'
excess amounts is $9,000. Under paragraph (d)(2) of this section, X
will allocate $5,333 of the $8,000 excess deemed NOL to A ($8,000 x
$6,000/$9,000) and $2,667 of the $8,000 excess deemed NOL to B
($8,000 x $3,000/$9,000). However, because A transferred all of her
shares of stock in X in a transaction not described in section
1041(a), A's $5,333 of section 1366(d) losses and deductions are
permanently disallowed under paragraph (d)(2)(iii) of this section.
Accordingly, at the beginning of 2009, B has $2,667 of section
1366(d)(2) carryovers and C has no section 1366(d)(2) carryovers.
(f) Effective/applicability date--(1) Paragraphs (a), (b), (c), and
Examples 1, 2, 3, and 4 of paragraph (e) of this section apply to
discharges of indebtedness occurring on or after May 10, 2004.
(2) Paragraph (d) and Examples 5 and 6 of paragraph (e) of this
section apply to discharges of indebtedness occurring on or after the
date that these regulations are published as final regulations in the
Federal Register.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-17952 Filed 8-5-08; 8:45 am]
BILLING CODE 4830-01-P
